A by-product of state-mandated retirement legislation, CalSavers is designed to improve the financial security of Californians working in the private sector. It also presents an opportunity for small business owners who otherwise wouldn’t have been able to afford the overhead or administrative costs of a retirement plan to keep employees engaged and attract new talent.
What is CalSavers?
CalSavers is a retirement savings program sponsored by the State of California, facilitated by businesses and funded by employee savings. It has no employer fees or fiduciary responsibility and minimal administrative upkeep, making it relatively simple for businesses to participate.
How does the CalSavers program work?
California law requires employers who don’t already offer retirement benefits to either enroll their employees in CalSavers or sponsor a qualified retirement plan on their own. If the state-run option is chosen, employees contribute to the plan via payroll deductions and can take their savings with them if they change jobs throughout their career, a feature commonly known as portability.
What businesses qualify for the California retirement savings program?
Employers that have at least one full- or part-time employee based in California may participate in CalSavers, or they can choose another retirement savings provider option. This eligibility applies to both for-profit and non-profit businesses.
Is CalSavers mandatory for employers and employees?
Participation in CalSavers is voluntary for employers. However, those who qualify but decline to join the program must sponsor a retirement plan through the private market or risk penalization. CalSavers is optional for employees, as well, and if enrolled by their employer, they may opt out at any time.
What are the registration deadlines?
- Eligible employers with more than 100 employees – September 20, 2020
- Eligible employers with more than 50 employees – June 30, 2021
- Eligible employers with five employees or more – June 30, 2022
- Eligible employers with one to four employees – December 31, 2025
Newly mandated businesses with five or more employees are required to register by the end of the calendar year in which they become subject to the mandate (due to employing five or more employees or because they ceased to sponsor a retirement plan).
Business size is based on the average number of employees reported to the Employment Development Department on the four DE9C filings from the previous year.
What type of retirement plans are available?
CalSavers is available as a Roth individual retirement account (IRA). This means that employees contribute to the program via payroll deductions on a post-tax basis, but when they retire, their income from the savings account is generally tax free. An option is also available for CalSavers participants who want to recharacterize their account to a traditional IRA. With this type of plan, contributions are made pretax and are then taxed at the time of withdrawal.
Are all employees eligible for the program?
Employees of a participating employer are eligible for CalSavers if they are at least 18 years old and have employee status under California law. The program does not have minimum requirements for hours worked or length of employment.
Individuals may be able to participate in CalSavers independent of their employer if they meet the following criteria:
- Are 18 years or older
- Have a source of income and a bank account
- Provide all personal information required to administer the program
- Make an initial contribution as low as $10 (recurring contribution options available)
What investment options are available?
Employees contribute to the CalSavers Money Market for 30 days following their enrollment, after which, they have two options. They can either let their initial savings and all future investments automatically transition to a CalSavers Target Retirement Fund based on their age and expected date of retirement. Or, they can customize their investments and choose from one of the following:
- Environmental, social, governance fund
- Core bond fund
- Global equity fund
- Money market fund
Does the plan offer auto-enrollment?
Employees who work for eligible employers are automatically enrolled into CalSavers at a default contribution rate of 5%, which increases 1% each year up to an 8% maximum. At any time, they can change their contribution level and rate of increase or opt out of the program altogether.
What employers need to know about the CalSavers program
Eligibility requirements and deadlines for employers
Employers with at least one employee are required to register for CalSavers unless they meet one of the following exemptions:
- The employer already sponsors a qualified retirement plan.
- The business was closed or sold.
- The company does not have any employees other than the owner(s).
- The business classifies as a government entity, religious organization or tribal organization.
The registration deadlines for employers with five or more employees have passed and compliance enforcement is underway. Businesses with one to four employees have until December 31, 2025 to enroll.
How to register a business for CalSavers
Employers can register for CalSavers within a few minutes, provided they have all the requisite information. They need to supply the following:
- Federal employer identification number (EIN) or tax identification number (TIN)
- CA payroll tax number
- CalSavers access code
Access codes are located on communications from CalSavers. Employers may also request one online.
Employer responsibilities under CalSavers
Although CalSavers is designed to keep administrative burdens at a minimum, employers do have some responsibilities with this type of plan. They typically have to:
- Register and add all participant data for eligible employees
- Provide program information to all current and new employees (optional)
- Manually enroll participants and make annual auto increase deferral adjustments
- Submit and track payroll contributions
- Track and honor opt out requests
Non-compliance penalties
California will serve failure-to-comply notices to any eligible employer who doesn’t join CalSavers by the appointed deadline or offer a qualified retirement savings program independently. If the business fails to comply within 90 days from receiving this notification, the state will fine it $250 per employee. After 180 days, the penalty increases to $500 per employee.
Is CalSavers the only option for employers?
As previously mentioned, participation in CalSavers is voluntary for eligible businesses as long as they offer another qualified retirement plan, such as:
- 403(a) Qualified Annuity Plan or 403(b) Tax-Sheltered Annuity Plan
- 408(k) Simplified Employee Pension (SEP) plans
- 408(p) Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA Plan
- 401(a) Qualified Plan (including profit-sharing plans and defined benefit plans)
- 401(k) plans (including multiple employer plans or pooled employer plans)
- Payroll deduction IRAs with automatic enrollment
What are the pros and cons of CalSavers for employers?
CalSavers is convenient and affordable for employers and it allows employees who otherwise wouldn’t have access to retirement benefits to save for the future. Yet, it’s not without its faults. Compared to other retirement plans, CalSavers offers fewer investment options and the maximum amount that employees can contribute per year is far less. Plan participants may also be charged between 0.825 and 0.99% in investment fees and state and administrative fees.
What are the differences between state-run IRAs and 401(k) plans?
Knowing the advantages and disadvantages of CalSavers, employers can make an educated decision about whether they want to participate in the program. Those who choose to explore another option, like a 401(k), will then need to compare and contrast the two plans. There are differences in administrative effort, contribution limits, tax treatment, investment options and more.
| State-Run IRA | 401(k) | |
|---|---|---|
| Administration | The state oversees retirement plan design while the employer is responsible for day-to-day administration | Employers have more control over plan design, contributions and investments |
| Contribution Limits | Follow Roth IRA contribution limits | Have higher contribution limits than state-run plans |
| Employer Contributions | Employers cannot contribute | Employers may contribute |
| Tax Treatment | Contributions are post tax | Contributions are pretax or post-tax depending on plan design elected by the employer |
| Investment Options | Limited, state-selected investment options | Broader range of choices, including mutual funds and index funds |
| Portability | Can be rolled over to another 401(k) or IRA when changing jobs | Can be rolled over to another 401(k) or IRA when changing jobs |
| Compliance | Employers need only comply with state deadlines and requirements | Employers are responsible for plan compliance and may need assistance from a retirement planning partner |
As illustrated in the chart, state-run retirement plans may seem like the easier choice in the short term. But these programs have no flexibility, making them bare minimum solutions rather than strategic benefits. Long term, 401(k) plans are more powerful, tax-advantaged savings tools that can help attract and retain talent.
For California small business owners, the state mandate presents an opportunity to create a more robust and rewarding retirement plan that can aid your recruitment and retention efforts. Connect with an ADP retirement planning services specialist to learn more about enhanced retirement plan solutions.
Frequently asked questions about CalSavers
Why is California sponsoring their own retirement plan?
California is one of several states sponsoring their own retirement plan to address the looming retirement savings crisis. CalSavers helps ensure all Californians have access to a workplace retirement savings account.
When did CalSavers start?
The California state government officially launched CalSavers in July 2019 as part of a phased rollout over three years. The first phase required eligible businesses with more than 100 employees to register, followed by those with more than 50 employees and finally, employers with five or more employees.
Is CalSavers legal?
CalSavers has faced legal challenges, but the Ninth Circuit Court of Appeals ruled in favor of the state-run program on May 5, 2021 and on June 15, 2021 denied the appellant’s request for rehearing.
Can self-employed persons participate in CalSavers?
Although they are under no requirement to offer retirement benefits, employers with fewer than five people may join CalSavers. This includes sole proprietors and partnerships.
When do employees become eligible?
Employees are eligible for CalSavers from the first day they are hired if they are at least 18 years old and are considered an employee under CA law. Participating employers have 30 days from the date of hire to provide the employee’s information to the state program.
What if my employee does not want me to disclose information?
CalSavers requires participating employers to provide information on all eligible employees to the state. The program has a strict privacy policy and uses the highest level of data security. Only the program administrator and recordkeeper have access to employees’ personal data.
What if my employee says they do not want to participate?
Employees who do not want to participate in CalSavers can opt out at any time by using the program’s automated phone system or website. They may also complete and mail a paper form. Employers can provide this information to employees, but cannot opt out on their behalf.
Can an employer make contributions on behalf of their employees?
Only employees may contribute to CalSavers. Employers who want to contribute or match employee contributions should explore options for sponsoring a retirement plan on their own.
How often do I need to send the contributions in?
Employers deduct employee contributions each pay period. They have seven days from the date of the payroll deduction to remit the contributions to CalSavers.
How do I communicate to our employees about CalSavers?
CalSavers provides employers with informational flyers, program materials and sample communications, which they may share with their workforce. However, they must remain neutral about their employees’ participation in the program. They may not provide investment advice or persuade employees to opt out.
Can my payroll service provider facilitate CalSavers for me?
Employers using a payroll service provider can add them to their account as a delegate. The payroll provider may then fulfill the employer responsibilities on their behalf.
How much does the CalSavers program cost employers?
CalSavers is an economical retirement solution for many business. It does not charge any fees to employers, nor does it require them to contribute to employee savings accounts.
How is the size of my business determined?
Business size is based on the average number of employees reported to the Employment Development Department on the four DE9C filings from the previous year.
This information is intended to be used as a starting point in analyzing state-mandated retirement plans and is not a comprehensive resource of all requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.
Unless otherwise agreed in writing with a client, ADP, Inc. and its affiliates (ADP) do not endorse or recommend specific investment companies or products, financial advisors or service providers; engage or compensate any financial advisor or firm for the provision of advice; offer financial, investment, tax or legal advice or management services; or serve in a fiduciary capacity with respect to retirement plans. All ADP companies identified are affiliated companies.
ADP, Inc. is affiliated with ADP Broker-Dealer, Inc. (“ADP BD”), a limited purpose broker dealer registered with the Financial Industry Regulatory Authority (“FINRA”), and operating pursuant to Securities and Exchange Commission (“SEC”) Rule 15c3-3(k)(2)(i), approved by FINRA to offer 401(k) and SEP/ SIMPLE IRAs, and related retirement plans (the “Retirement Products”) on a payroll deduction basis.
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